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PayPal's Stellar Third Quarter

PayPal not only grew impressively, but it is getting set to monetize one of its key assets.

PayPal(NASDAQ:PYPL) reported third-quarter earnings that beat expectations on the top and bottom lines, but that's not the main reason why shareholders are excited. It appears that PayPal now anticipates being able to monetize its popular Venmo platform sooner and more effectively than most investors had expected.

In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the numbers and what they could mean for the company.

A full transcript follows the video.

This video was recorded on Oct. 22, 2018.

Jason Moser: I wanted to go ahead and open up the conversation with PayPal, a company that all of our listeners are familiar with. I think it's a stock that you and I both own. At least, I own it. Do you own shares of PayPal, Matt?

Matt Frankel: I did. I actually sold it. I had eBay, so I acquired PayPal shares through eBay.

Moser: Very good!

Frankel: I got rid of it a couple of years ago to buy Square, which turned out to be a pretty good move.

Moser: Not a bad move at all!

Frankel: Yeah, it's tough to argue with that one.

Moser: I thankfully own both. I think that when you look at the quarter PayPal turned in, you have to feel really good about what they're doing. This is really all about the dollars that are flowing through that network. Total payment volume for the company was up 24% to $143 billion. Engagement, which is essentially the number of transactions on the trailing 12-month basis, was up. Mobile payment volume was $57 billion. My takeaway from the quarter was that they're doing a lot of really good things. There's a reason why the stock spiked on this release. I think, generally speaking, you have to be pretty optimistic. What's your take, Matt?

Frankel: This quarter in my mind was all about Venmo. You mentioned payment volume was up 24%. Venmo's payment volume was up 78%. That's really what's driving PayPal higher. Not only that, but we mentioned in an episode a week or two ago that they're trying to start to monetize Venmo. They announced that one in four members can be monetized right now. That's up from 17% last quarter, and much less than that last year. Not only is Venmo growing, but they finally think they can turn it into a significant revenue stream, which is a lot sooner than anyone really thought that was going to happen. That's my takeaway on this quarter.

Moser: I was looking for any and all language regarding Venmo that I could find. I think you're right, that's the forward-looking picture with this company. I think it's worth noting, we talk a lot about Venmo. You and I spoke last week about the fee change on the instant access side of the business. We have to keep an eye on how consumers are going to feel about that ultimately. For me, it was worth noting that while the results for Venmo were good, $17 billion of that $143 billion was through the Venmo network, which was significant. They said that 24% of users are now participating in a monetizable action. That's all great news, but I think what could get lost in the conversation is the fact that PayPal on its own, sans Venmo, is still doing a really good job. To me as an investor, that's an even better outlook, really. You're looking at not only the power of the PayPal platform, but also the Venmo platform, other platforms like Xoom, for example. These guys have a lot of different ways to make it work. From an investor's perspective, that's a really attractive part of this business.

Frankel: Yeah, definitely. PayPal is growing really well on its own, which is impressive, considering how big PayPal is. PayPal has become just part of our language, like, "PayPal me." Everybody uses PayPal, it seems, but they're somehow still growing very, very rapidly.

Moser: I think I'm going to hang onto my shares, Matt. I'm going to keep my Square shares, too. Like we say every week, if we could shut up for long enough, I'm sure we'd both add to our positions. Maybe after earnings season dies down, we'll have a chance.

Jason Moser owns shares of PayPal Holdings and SQ. Matthew Frankel, CFP owns shares of SQ and has the following options: short December 2018 $90 calls on SQ. The Motley Fool owns shares of and recommends PayPal Holdings and SQ. The Motley Fool has the following options: short January 2019 $82 calls on PayPal Holdings and short January 2019 $80 calls on SQ. The Motley Fool recommends EBAY. The Motley Fool has a disclosure policy.